Atlantic Council

Martin Wolf, chief economics commentator and associate editor of the Financial Times, believes the West, and particularly the United States, will actually emerge as more dominant financial actors as a result of the ongoing financial crisis.  While somewhat ironic, given that U.S. excesses led to the crisis, he sees the dollar and Euro strengthening their hold on the global economy as investors seek to weather the storm.   The crisis has "re-emphasized the centrality of U.S. dollar as a currency" and demonstrated once again that "when things go really badly lots of people want go to the U.S. even if U.S. is why, even in part, things are going so badly."

In an exclusive briefing on "The Global Financial Crisis and Post-Election Financial Trends" for Atlantic Council members, Wolf observed that, while the Paulson plan was initially "muddled and confused," the G-7s recapitalization commitment "has saved the core banking system."  As a result, "we got to where the Japanese were after eight years in just one year" and likely staved off a "truly horrendous" collapse of the overall system.

While the damage to the West's credibility is obvious, there is no plausible alternative.  Certainly, the "authoritarian capitalists do not offer a model of a global economy at all" and are "overwhelmed" by domestic challenges.  China, Russia, and India realize a "reasonably prosperous and successful" West and world economy are very much in their interest.

Still, "recessionary forces are incredibly powerful" and there are many signs that we should "expect a deep and prolonged recession."  The continued decline in the housing market is accelerating, particularly in the U.S. and the UK, and the rise in Anglo-Saxon household savings could, in a classic case that we should be careful what we wish for, further exacerbate the recessionary pressures.  We could have "a couple of years which are really grim."

He predicts that unemployment will rise dramatically and very quickly, particularly in the U.S. and UK — which have relatively flexible employment markets compared to Western Europe and Japan — as businesses respond to decreased demand.

The good news for consumers is that the collapse in commodity prices, most especially oil, should stave off inflation.  This will be offset somewhat, however, by enormous increases in public sector debts and deficits.

China, Japan, and Germany, the three countries with large surplusses, are not, in Wolf's view, taking the global implications of the crisis seriously enough or taking aggressive enough action outside their own borders.

China’s response to the financial crisis will likely be marginal.  The government feels as though its basic economic model, which has worked so well to date, remains sound and will probably not make any fundamental changes.  China may adjust its export and investment policies, but almost certainly will not reorient its economy toward domestic demand and allow a real appreciation of the exchange rate.  Furthermore, if the U.S. finds itself in a serious recession in the coming year and its trade deficit increases as a result of the strengthening dollar, serious friction could arise with China.  Wolf expects that in a year or so China may find the external political and economic environment much more unfriendly toward its policies than imagined.

Participants:

• Martin Wolf – Chief Economics Commentator and Associate Editor, Financial Times
• Frederick Kempe – President and CEO, Atlantic Council of the United States

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Related Atlantic Council Events:

• Schwab: Davos Model Key to Solving Systems Crisis
• Council Hosts Key Finance Leaders in New York
• A Look at Russia's Business Climate
• Conversation with ERBD President Jean Lemierre
  

Related Commentary on New Atlanticist Blog:

• Financial Crisis: What Doesn't Kill Us Makes Us Stronger? – James Joyner
• Financial Crisis Map – James Joyner
• Financial Crisis: The (Evolving) View From Europe – Peter Cassata
• Banking Crisis Not a Black Swan – James Joyner
• European Banks Too Big to Save? – James Joyner
• Financial Regulation American Style: Renforcement Du Contrôle – Ronald M. Freeman
• The End of Ideology: We are All French Now – Robert Manning
• Financial Crisis: View from Europe – James Joyner

Recent Columns by Martin Wolf in FT:

• Preventing a Global Slump Must be the Priority
• The World Wakes from the Wish-Dream of Decoupling
• A Policy Success amid the Disaster
• Governments Have at Last Thrown the World a Lifeline
• Asia's Revenge
• It is Time for Comprehensive Rescues of Financial Systems
• What Britain Must do in the Crisis